"Plethora” of complex regulation introduced in the wake of the financial
crisis risks “unintended consequences” that could impair the sale of
government debt

Burdening the City with too much “onerous” regulation could hamper the Government’s ability to fund itself, the head of the country’s Debt Management Office has warned.

Robert Stheeman , the chief executive of the DMO, said the “plethora” of complex regulation introduced in the wake of the financial crisis risked “unintended consequences” that could impair the DMO’s ability to sell government debt.

While Mr Stheeman said he had no problem with regulation in principle, he warned that if banks thought rules were too “onerous”, many could “pull back” liquidity from the market. “Banks [need] to be able to make markets in all conditions,” he told The Sunday Telegraph. “For them to do that . . . they need to commit risk capital to the market-making function — that is very important. So anything that constrains their ability to do that is of potential concern to us.

“Ultimately we need a healthy banking sector in order for our market to function well. If we put too many constraints on the ability of those banks to make markets, in the final analysis that will cause problems for us when it comes to funding the Government.”

Last week, the Bank of England admitted post-crisis changes to bank regulation had made it harder to judge how the financial system would react to another crisis.

Mr Stheeman said new aspects of regulation within Basel III, the Markets in Financial Instruments Directive (MiFID) - which covers financial services, and European Market Infrastructure Regulation - designed to reduce risk in the derivatives markets, could cause disruption in the market if policymakers did not fully understand the potential consequences.

"I do not want to leave the impression that the DMO is against regulation - all we ask is that regulation, if it has to be introduced, is done in a way that fully recognises the consequences so it can be implemented intelligently and constructively.

"It's important that in a time of great regulatory change, in which we now are, that decisions are not made that the authorities may come to regret."

Mr Stheeman also suggested the Bank of England could hold on to its £375bn stockpile of UK gilts for decades to come.

He said allowing some of the gilts to mature without reinvesting the proceeds was an "obvious" way for the Bank to gently reducing its holdings.

"If [the Bank] felt the need to ever so slightly tighten monetary policy conditions, one way of doing it is ... just to let them run off and not reinvest the proceeds," he said.

The Bank of England pledged in its February Inflation Report not to sell any of its asset purchases "at least" until the Bank began raising interest rates. The market currently believes this will happen in the second quarter of 2015.

With more than a third of the Bank's gilt holdings maturing beyond 2025, and more than £7bn which do not mature until 2060, this means the Bank could be owners of UK Government debt for decades.

The Bank began pumping billions of pounds of newly created money - known as quantitative easing (QE) - into Britain's troubled economy in 2009. Today, the Bank's holdings account for a third of the total nominal gilt stock in issuance.

Mr Stheeman said the DMO had regular discussions with the Bank on "operational" issues linked to QE, but insisted that any decision to start selling the stockpile rested solely with its policymakers.

"What the DMO wants to see is ... an orderly market," said Mr Stheeman. "We want to see a market that functions smoothly and efficiently and is not disrupted in any way.

"Put it this way, I think that these lovely people down the road in Threadneedle Street are going to be good, loyal investors for some time yet."